Dividends at big banks to rise as safety net to protect against financial meltdown is slashed

British banks are poised to boost dividends to investors after escaping orders to raise the amount of cash they have to hold in reserve.

The Bank of England yesterday told major High Street banks and building societies they must hold on to about £35billion to guard against financial meltdown.

This new rule will be introduced in two and a half years. In addition to other reserves, it means that banks will have to keep back around £200billion in total – a sum which is roughly in line with what they already have.

Boost: Instead of using capital to further bolster their reserves banks can return it to shareholders in dividends, or even cut the cost of mortgages

This means instead of using capital to further bolster their reserves they can return it to shareholders in dividends, or even cut the cost of mortgages.

But critics have warned even this figure might not be enough. Sir John Vickers, who chaired a commission on the banking industry, led calls for tougher requirements earlier this year.

‘Given the awfulness of systemic bank failures, ample insurance is needed,’ he wrote in the Financial Times. ‘The wisdom of this policy is questionable.’

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But analysts said the announcement would free up more cash for shareholders. Steve Clayton, head of equity research at Hargreaves Lansdown, said: ‘There’s going to be a little bit of relief – it could have been worse.

'With little by way of additional reserves necessary, the banks are going to have a good show. The expectations are simply going to be for further dividend increases.’

The change will affect large banks such as HSBC, Barclays and NatWest owner Royal Bank of Scotland, which have been ordered to separate their High Street divisions from their riskier investment arms.

Known as ring-fencing, the process will be completed by the start of 2019. This is when the new rules will kick in.

Larger banks will have to hold on to proportionally more money than smaller ones, with the aim of giving new lenders a chance to grow without facing massive costs.

Building societies with assets of more than £25billion will also have to hold cash back.

When deciding on the changes, the Bank of England’s Financial Policy Committee said their effect was likely to be ‘very small at present’.